New Clarity on Tax Impact of CARES Act Programs
On December 27, 2020, the President signed the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act of 2020 (the “Economic Aid Act”). In addition to extending the Paycheck Protection Program (“PPP”) for first time and second draw borrowers, the Act also included numerous tax provisions, some of which clarified a number of outstanding questions regarding the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and other previous United States federal stimulus programs.
While there is too much to unpack from the Economic Aid Act in a single update, the following is a brief summary of some of the primary tax provisions included in the Economic Aid Act:
Welcome clarification that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan (and that tax basis and other attributes will not be reduced as a result of PPP loan forgiveness). This supersedes prior guidance issued by the IRS that taxpayers who received a PPP loan in 2020 but who had either (i) applied for forgiveness by the end of 2020 and had a reasonable expectation of forgiveness (based on the fact that the payment of its eligible expenses qualified for reimbursement) or (ii) had not yet applied for forgiveness by the end of 2020 but expected to do so in 2021 and, again, had a reasonable expectation of forgiveness, would not be allowed to deduct those expenses. The prior IRS guidance was widely criticized as being inconsistent with Congressional intent, a position now generally confirmed by the Economic Aid Act.
Clarification that gross income does not include the forgiveness of Economic Injury Disaster Loans (EIDL), emergency EIDL grants and certain repayment assistance provided in the CARES Act.
The deferral of employee payroll taxes covered by President Trump’s August 2020 executive order, previously applicable only to wages paid between September 1, 2020, and December 31, 2020, has been extended from April 30, 2021 until December 31, 2021.
A variety of technical changes have been made to the calculation of the Employee Retention Tax Credit (ERTC), including an expansion of the applicable wages covered by the credit through June 30, 2021 (it was previously only applicable to wages paid through the end of 2020), an increase in the rate of the credit from 50% to 70% of qualified wages, an increase in the amount of per employee wages eligible for the credit from $10,000 for the year to $10,000 for each quarter, and an increase in the eligibility threshold from employers with not more than 100 employees to employers with not more than 500 employees. Importantly, the legislation also clarifies that employers who received PPP loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds, thus allowing employers to both receive a PPP loan and take advantage of the ERTC (just not with respect to the same wages).
Extending through March of 2021 the refundable payroll tax credits for paid sick and family leave (including for certain self-employed individuals) provided for in the Families First Coronavirus Response Act (it previously only applied to wages paid during the period from April 1, 2020, to December 31, 2020).
An increase in the business meals deduction to 100 percent for 2021 and 2022, suspending the 50% limit that is otherwise applicable to such expenses.
The tax provisions included in the Economic Aid Act provide numerous benefits for taxpayers, including welcome clarification and expansion of the ability to deduct PPP-related expenses and to take advantage of the Employer Retention Tax Credit.